Which Makes a Better Investment, A House or a Multifamily Property?

With signs of the real-estate market cooling, it may get harder to profit from investments. June Fletcher offers a few pointers for investors about making strategic decisions.
By: June Fletcher: The Wall Street Journal Online
Question: With reports of the real-estate market cooling, should I be investing in single-family or multifamily properties in the future? - Al Lee, Los Angeles, Calif.

Every real-estate investor is a gambler. And over the past few years, just about anyone who bought a single-family home on either coast, where prices have been appreciating at double-digit rates, has been a winner.

To illustrate, let's say that you bought an investment home for $200,000 three years ago, and it appreciated 15% a year - not unusual in many metro markets. And you bought it the normal way, without any below-market or unusual financing, with 15% down and a 30-year fixed-rate loan at 6%. Assuming annual expenses of $3,000 in property taxes, $500 in insurance and $1,000 in maintenance, and assuming your marginal income tax rate is 40%, your yearly costs were $16,731. Even considering the fact that your $30,000 down payment wiped out your first year's appreciation, you're coming out ahead on the deal - and that's before any rental income you may have received.

But single-family homes aren't likely to keep appreciating at such a blistering pace. Prices of both new and existing single-family homes fell in December, marking the end of the national housing boom. Dave Seiders, chief economist of the National Association of Home Builders, predicts home prices overall will increase 6.5% in 2006, about half the gain they made last year, and will slow even further, to 4.4%, in 2007.

Meanwhile, experts predict a brighter future for multifamily properties, which includes both for-sale and rental units. According to Mr. Seiders, "multifamily is doing well." McGraw-Hill's Construction Outlook 2006 report says that multifamily housing starts are expected to rise 1% over the coming year, while the "the sharp rise in housing prices in certain markets," the report says, "provides room for rents to move up."

Emerging Trends in Real Estate 2006, a report issued by the Urban Land Institute and Pricewaterhouse Coopers LLP, says that multifamily properties will lead other housing sectors this year as renters enter the market in greater numbers, "creating a full-blown landlord's market." The National Association of Realtors expects that this year, condominium prices will again set records, and that median condo prices will outpace those of single-family homes, as they did last year.

However, if you buy and lease out multifamily properties, you likely will be dealing with far more tenants - and their late-night clogged toilet problems -than you will as a single-family landlord. Your record-keeping hassles also will be multiplied (a good way for small property owners to keep track of cash flow, tax deductions, utility costs and other financial matters is through Quicken Rental Property Manager 2.0, which costs $99).

You can also get some help through LandlordAssociation.org, an Erie, Pa.-based organization, which provides its members such services as legal and tenant forms, information on repairs and lead-hazard risks, tenant credit-check reporting, electronic rent collection, debt recovery and properties for sale. The organization also provides leads to local real-estate investment clubs and commercial lenders. Membership is $40 a year, or $50 for two years.

June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.